LAPFF Engagement: Approach and Practice East Sussex Pension Fund 8th September, 2016 Presentation by Tessa Younger, Engagement Services Manager Lara Blecher, Engagement Executive PIRC Ltd, Research & Engagement Partner to LAPFF
About LAPFF • 71 UK public sector pension fund members, combined assets of approximately £175 billion • Mission: ‘ to protect the long-term investment interests of beneficiaries by promoting the highest standards of corporate governance and corporate responsibility amongst investee companies ’ • Longer-term approach: ensure returns are financially and environmentally sustainable
About LAPFF • Annually agreed research and engagement work-plan • Executive Committee meets quarterly • Quarterly Business Meetings • Supported by PIRC and Forum Officer
Holdings LGPS Reliable Accounts M&A Tax Carbon Risk People, Pay & Consultations Engagement Investment Value Spoke at Held inaugural European Published Issued the Helped to draft Discussed living wage Responded to thirteen AGMs meeting of All- Parliament M&A trustee Corporate Tax strategic resilience and adopted new LAPFF Task Force on in Q2 Party approves guide Transparency resolutions co-filed living wage policy Climate Parliamentary Economic Affairs Initiative at Rio Tinto, Disclosure Contributed Group on LGPS Committee report Posed Question Bank Glencore and Presented paper on Consultation through citing the LAPFF questions on to FTSE 100 Anglo American human capital policies engagement to Covered the legal position on M&A at receive 96-99% approved by LAPFF Submitted Singapore infrastructure IFRS company Commissioned votes members in April consultation Technologies implications in engagement tax expert response to decision to LGPS seminars Obtained second meetings, Richard Murphy Engaged with Joined TUSO effort to Hong Kong drop cluster for members opinion from including to draft a report companies, ensure Carillion and stock exchange munitions work George Bompas AstraZeneca summarizing including AGM Interserve are upholding on carbon Continued QC on and Hays the survey attendance, on appropriate labour reporting Issued voting seminars and inconsistency of responses carbon risk with standards in Qatar alert on Sports consultations IFRS standards Proposed Shell, BP, BHP, Rio Submitted Direct and its with members with legal meaning engagement Met with survey Tinto, Anglo, Undertook company consultation poor on LGPS pooling of true and fair with Rentokil non-responders Glencore and engagements on response on governance arrangements view on M&A to determine Total, among blacklisting with Carillion human rights and work place strategy best way others and Kier Group reporting arrangements Held latest Contacted FTSE forward seminar on 350 regarding the Analysis on Glencore, ENI and Engaged with GKN, Weir Submitted a Continued Responsible second Bompas Sainsbury's Attended tax Total publish and Tullow on diversity range of engagements Investment, Opinion intended risk events on enhanced climate and participated in consultation on executive Shareholder acquisition of behalf of LAPFF reporting following Equality and Human responses on pay with, Rights and Engaged with FRC Argos, as engagement Rights Commission IFRS/audit among others, Pooling on viability ‘live’ test of diversity roundtable considerations Private & Confidential 4 Nestlé and statements and the Trustee Hays climate risk Guide.
The engagement versus divestment debate • Shareholders that engage with individual companies seek to exercise ‘voice’, rather than choosing to ‘exit’ completely. • With no holdings, investors are poorly placed to influence companies • Engagement is more than voting, but voting remains a vitally important element of engagement
Shareholder engagement: what it is, why we do it • Engagement is conducted face to face by trustees, Councillors and Officers of the fund’s themselves • Aim to encourage companies to adhere to high standards of corporate behaviour, ultimately to ensure they are well- run and deliver sustainable shareholder returns • Collaborative engagement is seen as an important element of improved stewardship
Shareholder engagement A focus on effective outcomes, c.f. Lord Myners “ Shareholders cannot micromanage the companies in which they have holdings� but � where they identify problems, they should actively engage with the company to ensure that they are tackled ” “ Intervention requires persistence and a thick skin, perhaps raising issues repeatedly over a period of time with firmness until concerns are addressed. Merely meeting senior management and expressing polite reservations about strategy is not sufficient, if it is not effective. ”
Effectiveness of LAPFF engagement Engagement Outcomes • Over 70% of meetings with board directors • All engagements assessed on outcomes • Time is a factor� • � as is persistence Dialogue Moderate Improvement Substantial Improvement Satisfactory Response Awaiting Response Small Improvement Change in Process
Current LAPFF initiatives: Executive Pay • 2016 - a new shareholder Spring? • Votes of over 50% at a number of companies including BP, Smith and Nephew • WPP and Standard Life, 33% and 22% oppose votes respectively • New approach outlined by UK government 9
Carbon Risk • LAPFF a member of the ‘Aiming for A’ investor coalition since its inception in 2012 • Resolutions filed to BP & Shell’s 2015 AGMs asked for reporting on - ongoing operational emissions management - asset portfolio resilience to International Energy Agency scenarios - low-carbon energy Research & Development and investment strategies - strategic Key Performance Indicators and executive incentives - public policy positions relating to climate change 10
Strategic Resilience Resolutions • Prior to the AGMs, both boards advised shareholders to support. This is a first in the UK and reflects the long-term positive engagement with both company chairs and senior management • Resolutions received a vote of over 98% in support at both AGMs • Has set a precedent that nearly every significant institutional investor in the world has voted for disclosure of a low-carbon business strategy 11
Engagement, resolutions and outcomes • In 2016 after continued engagement, BHP issued a report setting out low carbon scenario • Resolutions filed at Glencore, Rio Tinto and Anglo- American • All three boards advised shareholders to support the resolutions and they received 96% support or more • Continued engagement with UK and European companies including Total 12
Two-degree business model less risky • The business model for many oil & gas companies appears to assume demand will follow past trends, rising steadily for the foreseeable future • Analysis shows two degree business model less risky than ‘business as usual’ for oil and gas companies 13
Tax Transparency • Responsible tax payment has risen in prominence as a significant governance issue for investors • LAPFF has been engaging with the FTSE 100 via its Corporate Tax Transparency Initiative questionnaire • Subsequent company meetings are fleshing out next steps for companies to report more fully on their tax practices • LAPFF has commissioned tax expert, Richard Murphy, to consult on this engagement. Outcomes are starting to feed into ideas for overcoming this disclosure barrier 14
Human Capital Management • LAPFF has recently undertaken new research on human capital management • This builds on prior LAPFF research indicating that HCM is an important element of business strategy • The latest research suggests that there is a strong link between HCM and shareholder value� we’re just not sure yet how that link works 15
Human Capital Management • Areas covered under LAPFF’s HCM work include: – Diversity: Halfords – Labour Standards • Living wage: SSE • Zero hour contracts: Sports Direct – Employment Standards in the Supply Chain • Corporate dualism: National Express • Qatar: Carillion and Interserve 16
Labour standards at National Express • Cllrs Greening and Wilkinson attend the 2014 AGM to speak to a resolution co-filed by LAPFF funds on workplace rights in the US • In 2015 LAPFF funds file shareholder proposal calling for independent review of labour issues at US school bus subsidiary • Almost a quarter of independent shareholders fail to back the company; the highest level of support for a shareholder resolution on employee rights
Questions, comments, feedback? www.lapfforum.org info@lapfforum.org 20 7247 2323 e Financial Conduct Authority
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